Creating a Contract: Protecting Yourself and Relationships in Business

by: Marjorie Geiser

Many business professionals consider contracts as something scary and a detail that often they don't need to concern themselves with. I have heard many clients mention that they don't want to offend the other party. Many people state they don't want the other party to assume they mistrust them, yet the problem is not one of honesty, but one of reaching an agreement that both sides understand. Not only will your insistence of a contract show your professionalism, but will improve the relationship, and protect all parties in the long run.

Often new business professionals in the health field may need to contract with other professionals in order to see clients. Examples include registered dietitians who wish to rent space in a physician's office, or a personal trainer who wishes to contract with a facility in order to see clients. If you plan to work with corporations, you will also need a contract that spells out the responsibilities and expectations of each party.

This article will discuss why you should create a contract with anyone you plan to do business with, what makes up a contract, and then touch on the use of electronic contracts.

Why should you create a contract?

I work with many health professionals who have already entered into verbal agreements with facilities or physicians, or even friends, with no consideration that a written agreement is necessary. However, there are several reasons why a written contract is important.

A) Many people learn the hard way that entering into an oral contract can lead to misunderstandings. One example is with Mary, who went into an oral agreement believing she would be ‘contracting' with a physician and could see clients referred from other doctors, yet the physician believed that he had exclusive rights to Mary and when he realized she would be seeing other clients in his office, he quickly terminated their agreement. This was devastating to Mary, yet it could have been prevented if the two of them had worked through the process of creating a clear, written contract that explained the duties and expectations of each other.

B) A huge issue develops when friends decide to go into business together, or collaborate on a project together. Nothing will end a friendship faster than a misunderstanding around business! An oral agreement can include items/issues that each party may remember differently with the passage of time, yet if it is in writing, and the friends came to a mutual agreement on each item, the friends can refer back to that agreement. One can always amend the agreement, yet friendships may permanently end as a result of each party remembering something differently.

C) Although oral contracts can be binding, they can be difficult to enforce, so it's worth the time necessary to put it all in writing.

Studies have shown that people tend to be unrealistically optimistic about the future of their personal relationships. It's this optimism that leads to the importance in drawing up a contract when doing business with someone you have any type of relationship with. Because parties believe it is unlikely that misunderstandings will arise, they spend little time drafting up a carefully worded contract. They also overestimate the strength of memory. During negotiations, some issues seem so obvious that no one thinks to include them in the contract and as time and memories fade, parties find themselves differing as to what they thought they originally agreed to.

When two parties agree in the importance of collaborating to create a comprehensive contract, the process can help bring up misunderstandings and unclear points that would otherwise be missed and could result in legal problems, later. What can develop into a healthy, synergistic business relationship with a carefully worded contract and be quickly derailed with misunderstandings due to no written document to refer to when questions come up around the relationship.

What makes up a contract?

A contract can actually be a very simple document. A legal contract does not even have to be in writing, but in order for any contract to be legally binding, there are four basic requirements they all must have, written or oral:

1. Offer and acceptance:

a. An offer is a statement by a person that indicates a willingness to enter into a bargain on the terms stated.
b. An acceptance occurs when the person to whom the offer was addressed indicates a willingness to accept the proposed bargain.

For a service professional, an example would include an offer to pay a certain price or percentage of business in exchange for space to see clients and acceptance of that offer from the person with the space.

Under common law, the acceptance must be the mirror image of what is being offered; otherwise there is no contract. There is also no contract if the offeree does not accept the proposal.

If the offeree does not accept the offer, but instead offers different terms, this is considered a ‘counteroffer', not an acceptance. Only when the initial offeror accepts the different terms proposed will a contract form. It is not uncommon for negotiations to involve several rounds of counteroffers before a contract is formed.

Another important point for readers to keep in mind is whether the person signing the contract has the authority to sign for the company. When contracting with a corporation and with governmental bodies do your due diligence to understand who has authority to sign. This is a perfect time to address that any contract you enter into that involved a significant arrangement, a corporation, or a governmental body, be sure to consult with an attorney for assistance in drawing up a legal and binding contract.

2. Consideration:

a. This is anything of value that is exchanged between the parties. It can be money, property, a promise to do something or a promise to not do something. It literally means ‘a bargained-for exchange'. The requirement is met when one party gives up something of value in exchange for the other party's giving up something of value.

An example would be the exchange that one person would provide space and the other person would pay a certain amount for the privilege of using that space.

When the original contract is modified, additional consideration must be provided in order for the modifications to be enforceable.

An important key is that both parties must provide something of value. The item of value each is providing in our example is, 1) the person providing the space is giving up that space, and 2) the person paying is giving up a portion of income for that space.

3. Both parties must have the capacity to enter into a contract:

a. This just means both parties must be mentally competent and not a minor

4. The contract must have a legal purpose:

a. This would be what the purpose of the contract is all about.

Using the above examples, the legal purpose of the contract is that the offeree is offering to pay the offeror a certain sum in exchange for the use of space.

A bilateral contract is where one promise is exchanged for another promise, such as in the example above. A unilateral contract is a promise in exchange for a certain act. A good example would be that you have agreed to speak for a certain sum of money.

A final section of all contracts should also include an ‘integration' or ‘merger clause'. This is a statement at the end that states, “this agreement constitutes the entire agreement of the parties and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties.”

Electronic contracts

Most states in the US have enacted the Uniform Electronic Transactions Act (UETA), which sets forth four basic rules regarding contracts entered into by parties who agree to conduct business electronically.

1. A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

2. A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

3. An electronic record satisfies a law that requires a record to be in writing.

4. An electronic signature satisfies a law that requires a signature.

Almost any mark or process intended to sign an electronic record will constitute an electronic signature, including a typed name at the bottom of a computer screen where a person clicks on “I Agree” on a Web page. Two elements are necessary to create a valid electronic signature:

1. The person must intend the process or mark to act as a signature, and

2. The electronic signature must be attributed to that person.

In 2000, the US Congress enacted the E-Sign Act to ensure a more uniform treatment of electronic contracts across the US.

To protect people who do not have access to electronic business or computers, both Acts require that the use of electronic signatures be voluntary. There are some documents that are excluded from electronic signatures, however. These include wills, codicils and trusts, contracts or records related to adoption, divorce or other family law matters, and certain contracts governed by provisions of the UCC in each state. The E-Sign Act also excludes all official court documents, notices of cancellation of utility services, notices regarding agreements for primary residences, notices of cancellation of health or life insurance benefits, notices of recall, and documents required to accompany the transport of hazardous or toxic materials or pesticides.

Consider a carefully written contract as a sign of potential growth for your business and a tool to enhance all of your professional agreements and collaborations. You are in business to succeed, and the use of contracts in the process of running your business is one way to ensure a smooth progression from start-up to great success!

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About the Author:
Marjorie Geiser is a registered dietitian, certified personal trainer and life coach. Marjorie has been the owner of a successful small business, MEG Fitness, since 1996, and now helps other health professionals start up their own private practice. To learn more about the services Margie offers, go to her website at www.meg-enterprises.com or email her at margie@megfit.com">href="mailto:margie@megfit.com">margie@megfit.com.

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Date Published : Oct 12 2009

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Contract Management Articles

Creating a Contract: Protecting Yourself and Relationships in Business